Beginning In 2025, OBBBA Eases Business Interest Deduction Rules

This 2025 taxable year and beyond, One Big Beautiful Bill Act (OBBBA) permanently installs more favorable rules for determining how much business interest expenses can be currently deducted. Read on to understand the favorable changes and summary on how the business interest expense limitation riles work.

Business interest expenses deduction limitation basics

When we say “the taxpayer”, we mean whoever pays interest expenses connected with business activities; that taxpayer could be you or your business entity, such as a partnership, an LLC or a corporation.

The deduction for business interest expense for the year in question is limited to the sum of

The taxpayer’s business interest income,
30 percent of the taxpayer’s adjusted taxable income (ATI), and
The taxpayer’s floor plan financing interest expenses.

Any business interest expense that is disallowed by this limitation is carried forward to future tax years.

The OBBBA liberalizes the definition of ATI and expands what constitutes floor plan financing. These changes will allow bigger business interest expense deductions for affected taxpayers.

“Business interest expense” means interest on debt that is allocable to a trade or business. It does not include investment interest expense.

The limitation on business interest expense applies to businesses regardless of their form, subject to several conditions.

For partnerships, LLCs treated as partnerships for tax purposes, and S corporations, the business interest expense limitation rules are applied first at the entity level and then at the owner level, following complex instructions.

Key point

Apply the business interest expense limitation rules before applying

The passive activity loss (or PAL) limitation rules,
The at-risk limitation rules, and
The excess business loss disallowance rules.

For pass-through entities, apply those rules at the owner level.

Other federal income tax provisions that disallow, defer or capitalize interest expense are generally applied before applying the business interest expense limitation rules.

Businesses exempt from the limits

There are several expectations for the business interest expense limitation rules.

Probably the most important exception is the exemption for businesses with average annual gross receipts that, for the three-tax period ending with the prior tax year, don’t exceed the inflation-adjusted threshold. For tax years beginning in 2025, the inflation-adjusted threshold is $31 million. This exception exempts many businesses, maybe including yours, from the business interest expense limitation rules.

The following businesses are also exempt.

The trade or business of performing services as an employee
An electing real property trade or business that agrees to depreciate certain real property assets over longer periods.
An electing farming business that agrees to depreciate certain farming property assets over longer periods.
Any trade or business that furnishes the sale of electrical energy, water, sewage, disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if a specified governing body establishes the rates.

Tax planning advice:

Suppose you operate a real property or farming business and are considering electing out of the business interest expenses limitation rules. In that case, you must evaluate the trade-off between deducting more business interest expenses and slower depreciation deductions. You can beat the big factor in the depreciation slowdown if you can use Section 179 expensing – for example, on qualified improvement property or personal property,

Favorable OBBBA changes

For the taxable year 2025 and beyond, the OBBBA stipulates that ATI is computed before any deductions for depreciation, amortization, or depletion. This change more closely aligns the definition of ATI with the financial accounting concept of earnings before interest, taxes, depreciation and amortization (EBITDA). It increases allowable deductions for business interest expense by increasing ATI.

Also, for the taxable years 2025 and beyond, the OBBBA expands the definition of floor plan financing to cover financing for trailers and campers that are designed to provide temporary living quarters for recreational, camping, or seasonal use and are designed to be towed by or affixed to a motor vehicle. For affected businesses, this change increases allowable deductions for business interest expense.

Calculating the business interest expense limitation

If your business is affected by the business interest expense limitation rules, calculate the limitation using IRS Form 8990, Limitation on Business Interest Expense Under Section 163(j).

FAQs

What are the main changes under OBBBA for 2025?
Starting in 2025, the OBBBA makes permanent and more favorable rules for deducting business interest expenses, allowing greater deductions by broadening the definitions of adjusted taxable income (ATI) and floor plan financing.
What is “business interest expense”?
Business interest expense is interest on debt allocable to a trade or business; it does not include investment interest expense.
How are the limits applied for pass-through businesses?
For partnerships, LLCs (treated as partnerships), and S corporations, the limitation is calculated first at the entity level, then at the owner level, often requiring complex instructions.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.